W.R. Berkley Is Well Positioned for Current Market Conditions

Senior Equity Analyst

Brett Horn

W.R. Berkley's niche focus and strict underwriting discipline result in a business model that has historically earned outstanding returns during hard market pricing periods, but only modest excess returns during soft periods.

In 2020, the pandemic negatively affected both the industry's and W.R. Berkley's results. However, losses in 2020 were very manageable and well within the range of historical events that the industry has successfully absorbed in the past. W.R. Berkley recognized losses roughly in line with peers. 

However, the industry picture has since brightened significantly. The pricing environment had not been particularly favorable for commercial lines in previous years, and W.R. Berkley had stayed cautious as a result. However, in 2019, pricing momentum picked up in primary lines, and this positive trend only accelerated in 2020. 

While higher pricing was necessary to some extent to offset some negative claims trends, pricing increases has more than offset these factors. As a result, W.R. Berkley and peers have experienced a positive trend in underlying underwriting profitability, and the company got more aggressive.

In our view, we are in the midst of a truly hard pricing market, similar to what the industry saw in 2003. In this scenario, we think narrow-moat and highly disciplined operators such as W.R. Berkley are positioned to earn very attractive returns for an extended period.

Starting in 2003, the company generated returns above 20% for five years. However, given that the industry remains well-capitalized, we think the magnitude and duration of excess returns will likely be lower than during that period.

Still, we think W.R. Berkley will generate strong returns in the near term. Management's previous decision to shorten fixed income duration has been a further boost given the recent rise in interest rates. More importantly, we remain confident that management's approach will favor shareholders in the long run.

Business Strategy & Outlook

In general, property-casualty insurers do not benefit from favorable competitive positions. Industry competition is intense, and the products are essentially commodities. Furthermore, participants do not know their cost of goods sold sometimes for a number of years, causing them to underprice policies without knowing it. Firms have a large incentive to chase growth without regard for profitability, a cycle that repeats itself as competitors are forced to match artificially low prices or risk losing business. 

However, we believe W.R. Berkley has set itself apart from the industry by focusing on specialty lines, which are subject to less competition than traditional insurance lines, and we believe the company has a Morningstar Economic Moat Rating of Narrow. About 30% of the company's premiums are generated in excess and surplus lines. This, combined with Berkley's focus on long-term value, allows it to write business at favorable prices while maintaining the discipline to decline underpriced policies. This shows in the company's loss ratio, which averaged 62% over the past 10 years, well below the industry average. 

While this is partially offset by a higher-than-average expense ratio given the need to maintain a staff of experienced underwriters (W.R. Berkley's expense ratio averaged 32% over the past 10 years), the gap in the loss ratio is sufficient to generate significant excess returns over time, in our view. Additionally, we believe the company's expense ratio had been somewhat elevated during much of this period, as W.R. Berkley expanded into new lines and geographies. More recent results indicate the company has now leveraged these investments, which should improve its already impressive underwriting results.

Narrow

Economic Moat

W. R. Berkley

W.R. Berkley Corp. is an insurance holding company, which engages in the property casualty insurance business. It operates through the following segments: Insurance and Reinsurance & Monoline Excess. The Insurance segment includes excess and surplus lines, admitted lines, and specialty personal lines throughout the United States, as well as insurance businesses in the United Kingdom, Continental Europe, South America, Canada, Mexico, Scandinavia, Asia, and Australia. The Reinsurance & Monoline Excess segment is involved in the reinsurance business on a facultative and treaty basis, primarily in the United States, United Kingdom, Continental Europe, Australia, the Asia-Pacific region, and South Africa. The company was founded by William R. Berkley in 1967 and is headquartered in Greenwich, CT.

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